CHAPTER 8 THE EFFECT OF BANKRUPTCY ON ENVIRONMENTAL LIABILITIES
| Jurisdiction | United States |
(Nov 1988)
THE EFFECT OF BANKRUPTCY ON ENVIRONMENTAL LIABILITIES
Jones, Waldo, Holbrook, & McDonough
Salt Lake City, Utah
The purpose of this paper is to explore the interrelationship of the bankruptcy and environmental laws. Although the law in this area is relatively new and is still developing, there are several significant issues which both debtors and creditors should be aware of. The impact of environmental laws on bankrupt debtors, and upon the ability of their creditors to recover funds from the estate, are far-reaching.
Most of the case law in this area has only been decided in the last four years. The decisions revolve around several basic conflicts between the purposes of the bankruptcy laws1 and the environmental laws.2
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This topic may arise in several contexts. For example, a debtor may be responsible as an owner or operator of an oil well or an oil recycling facility for the cleanup of the site. A debtor may be a past or present generator of discharges into the air or water; or of hazardous waste. Joint interest owners who become creditors of a debtor, or who are jointly and severally liable for a site may be impacted. A company may be a transporter of waste generated by other parties. The affected party may be a mortgage holder or a mechanics' lien holder who forecloses its lien and thereby acquires environmental problems on the site. A purchaser of a debtor's assets out of bankruptcy will also be affected. Creditors who receive distributions in property such as undivided interests in wells, processing plants, or unexplored acreage, may also inherit environmental liabilities.
Both the federal and state governments may attempt to enforce environmental laws against a debtor and/or its creditors. Further, private parties have the right to enforce environmental laws under several statutes; or private parties may bring suit for the abatement of environmental nuisances.
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The debts of an individual can be discharged in bankruptcy, while the debts of a corporation cannot be discharged.3 The rights of all interested parties will therefore be affected by whether the debtor is an individual or a corporation. Individual officers of a corporate debtor may have personal liability for environmental problems both as officers and as individuals.4 The Environmental Protection Agency has an official policy of pursuing financially solvent individuals if a corporation with which they are connected becomes insolvent.5
In other words, in any bankruptcy proceeding which involves environmental issues, there are many factors which should be considered. At the earliest possible time, counsel should undertake a careful analysis of the impacts of the environmental laws on each party's position.
The tenor of this paper assumes that the reader has some familiarity with both bankruptcy laws and environmental laws. If a reader wishes to review a good summary of these
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laws and their interrelationship, he or she should read two articles cited below.6
The Bankruptcy Code has two primary purposes. First, to provide a debtor with a "fresh start" and with the ability to reorganize its business. Second, to distribute assets to creditors in a fair and equitable manner. On the other hand, the primary purposes of the environmental laws are not concerned so much with the rights of individual parties, as with the need to protect the public health and the environment.
These statutory policies have come into direct conflict in bankruptcy situations where environmental liabilities exist. The conflict has surfaced primarily in the following five areas:
1. Determining whether an environmental liability is a "debt" or a "claim" which is dischargeable in bankruptcy.
2. Determining whether environmental cleanup costs have a priority ahead of other creditors.
3. Issues regarding whether a debtor may abandon a hazardous waste site or other environmental liability which is "burdensome" or of inconsequential value to the estate.
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4. Application of the Bankruptcy Code's automatic stay provision to actions which seek to compel a debtor to comply with environmental requirements.
5. Determining whether a bankruptcy petition should be dismissed (so that the debtor is no longer in bankruptcy), to allow a more effective response to the threat of environmental harm to the public.
Each of these issues is discussed below.
I. DISCHARGEABILITY
Bankruptcy generally acts to discharge a debtor from the responsibility of paying prepetition "claims" or "debts".7 There are, however, certain exceptions to dischargeability.8
In the environmental area, the case of Ohio v. Kovacs9 is the first case on this issue to reach the United States Supreme Court. In this case, Ohio obtained an injunction against the Chief Executive Officer of a corporation, Mr. Kovacs, ordering him to clean up a hazardous waste site owned by the corporation. When he did not comply, a receiver
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was appointed to take over possession of the individual's and the corporation's property; and to clean up the site. The CEO then declared bankruptcy.
The State of Ohio alleged that the debtor's liability to clean up environmental problems was not dischargeable. The state argued that the court orders requiring cleanup were equitable in nature, and were therefore not a claim or debt of the debtor. The Supreme Court disagreed with Ohio, and held that the obligation to clean up the site could in fact only be performed by the payment of money. The obligation was therefore a claim or debt which was dischargeable in bankruptcy.
This holding may have a significant impact on the manner in which companies do business. For example, a company which would otherwise be liable for environmental cleanup costs may be able to avoid liability—at least to the extent it involves the payment of money—by utilizing the bankruptcy laws. And bankruptcy is now available for solvent as well as insolvent debtors. Thus, companies which have large potential liabilities may be encouraged to file bankruptcy. In fact, this is apparently exactly what induced the Johns-Manville group of companies to file bankruptcy in the face of $2 billion worth of asbestos damage claims.10
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Other parties which are jointly and severally liable with bankrupt debtors may become solely responsible for the debt, even if they contributed less to the violation than the bankrupt. The potential of bankruptcy will also give less solvent parties a better negotiating position in any attempt to apportion liability among joint tort-feasors. Plaintiffs may sue only those parties which will not avail themselves of the bankruptcy "out."
Secured creditors of a company may also be more willing to force a debtor into bankruptcy since the creditors may be able to recover more of their debt than if the debtor had to pay all its environmental liabilities. Governments will also be affected to the extent they must pay cleanup costs from which debtors are discharged.
The Kovacs ruling is, however, limited. The Supreme Court emphasized that the decision only applied to the specific facts before it. The case may have been decided differently if Kovacs had filed his bankruptcy petition before the appointment of the receiver, rather than after such appointment. Further, since the receiver had taken over the site and partially cleaned it up, there was clearly an amount of money owing to the State for the cleanup. If this had not been the case, the mere obligation to clean up the site might not have been characterized as an obligation to pay a debt.
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Even though the "debt" was dischargeable, the Court noted that Kovacs would still be subject to criminal prosecution for violation of the environmental laws; and contempt proceedings for failing to comply with the state court's orders. Further, the Court admitted that parties in possession of the site still had to comply with environmental laws against further pollution; and that such parties had to remove the source of pollution. The Court specifically noted that anyone receiving the property upon abandonment, or a purchaser of the property from the trustee or receiver, would continue to have such responsibilities.
Clearly, the Kovacs case does not provide protection from fines or administrative penalties; or protection from criminal prosecution. Section 523(a)(7) of the Bankruptcy Code provides that fines, penalties, or forfeitures payable to or for the benefit of a governmental unit are not dischargeable unless they are considered to be compensation for the government's actual pecuniary loss. Also, bankruptcy courts have generally held that orders of criminal restitution are not dischargeable.11
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For example, in the mining law context, in the case of In re Daugherty,12 a bankruptcy court held that a civil penalty assessed against a coal mining company debtor for violation of the surface mining laws, was not discharged even though the penalty amount was paid into a state reclamation fund.
A more recent case which involved an oil company is In re The Charter Company,13 . In that case, two companies which were joint tort-feasors with the debtor filed claims for contribution or "indemnification" against the debtor for amounts owed due to improper disposal of dioxin-bearing waste into a river. The creditors filed claims against the debtor based upon their contingent liability for the payment of damages and cleanup costs.
The court held that the claims were still contingent, and therefore had to be disallowed under Bankruptcy Code Section 502(e)(1)(B). The dischargeability or non-dischargeability of the environmental debt was held to be irrelevant. The court held that this issue could be decided once the contingent claims matured. In view of the Kovacs decision, one wonders whether the joint tort-feasors...
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